NY Fed Boosts Reverse Repo Maximum Bid to $7 Billion

The Federal Reserve Bank of New York is boosting the maximum bidding size available to participants in a program now being tested to see if it can provide better control over short-term interest rates.

The bank said Tuesday the maximum bidding size available to participants in the overnight fixed rate reserve repurchase agreement program, or “reverse repo” facility, will rise to $7 billion, from $5 billion, starting with Wednesday’s operation. The New York Fed said the change has no monetary policy implications.

The reverse repos take in cash from participating banks, money managers and other firms, in exchange for Treasury bonds offered overnight by the central bank. The Fed is testing the program through the start of next year. Officials are hoping the facility, which drains liquidity from the financial system, will be a valuable tool to set a floor under short-term rates when the time comes to tighten monetary policy.

For a program in testing mode, the reverse repo facility has been in high demand. For much of this year, operations have been coming in around $100 billion a day–Tuesday’s totaled $66 billion. Market participants attribute the activity to a dearth of borrowing collateral in the broader repo market, where market participants go to finance their trading positions.

It is possible the reverse repo operation size could increase due to the bidding size bump. That said, Fed officials have shown no sign they are unhappy about the level of usage, as the high levels of activity provide an important laboratory to see how this novel tool functions.

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